Private Label Credit Cards in the U.S., 7th Edition

12 Oct 2011 • by Natalie Aster

Interesting times are ahead, according to the report “Private Label Credit Cards in the U.S., 7th Edition” by Packaged Facts. As America continues to struggle with an economy in hyper-flux, the private label card industry has stabilized the free-fall seen in the 2007-2010 period, setting the stage for future growth. With essentially all portfolios now being managed by third parties, improved credit quality and declining charge-offs, and indicators that consumer retail sales are picking up, issuers and retailers are focusing on their respective strengths moving forward.

There will still be hiccups in a return to growth but Packaged Facts forecasts receivables for private label card programs to reach $152 billion by 2015. While not to the levels seen pre-recession of $156 billion in 2007, the market should be cautiously optimistic. The future will still see many challenges but hopefully the good kind-such as how to integrate mobile technologies in to private label programs.

In the past, the majority of large retailers issued their own cards through their own financial services divisions, in which case they were responsible for all terms and risks of the credit card account, but also retained all of the operating income generated by the card. Today, the majority of retailers have their cards issued through third-party banks and financial services companies, such as Citibank and GE Capital Retail Finance.

In this scenario, the bank is the legal entity that is actually lending money to the consumer and with whom the consumer has a contract; the contract governs the pricing and payment terms of the credit card account. The bank also has a contract with the retailer, which governs the services it will perform for the retailer, as well as what its payment structure for these services will be. The bank assumes the risk, and typically provides support services as well, freeing up the retailer to focus on its core competencies, such as product selection and instore merchandising.

First-rate support services to retailers—including everything from credit authorization to card issuing and statement preparation, as well as marketing, advertising, rewards program administration, and customer service—has become increasingly important as the pool of major card portfolios available for acquisition dwindles and contracts come up for renewal.

Retailers (and consumers) are often disappointed with the quality of customer service provided by third-party providers, which represents a crucial off-site relationship between the store and the shopper.

Also at play in the market are acquirers, the organizations responsible for processing transactions generated by private label cards, and often Visa, MasterCard, and other plastic payment options, as well, such as debit cards or purchasing cards. The acquirer must be a member of Visa, MasterCard, or another payment system, or have a contractual relationship with a member organization. In addition, the acquirer has a separate contractual relationship with the merchant and charges a fee for processing the credit card transactions.

Acquirers are often banks, but also include nonbank organizations. The private label card market is also supported by a variety of organizations providing services related to application processing, storage and retrieval of sales drafts, and customer service, although larger issuers and acquirers have brought many of these services in-house in an attempt to provide the greatest economies of scale for their retail partners.